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ichor holdings, ltd. (ichr) ceo tom rohrs on q1 2019 results - earnings call transcript

by:Mingquan Machinery     2019-11-22
Please start: 16: 30 on January 1, 0000 at 5: 27 p. m. ETIchor Holdings Limited. (NASDAQ:ICHR)
Conference call first quarter 2019 earnings meeting 2019 p. m. 04:30IRTom Rohrs -
Chairman and CEO Andreson
Deutsche Bank-D. A. Davidson & Co. Karl Ackerman -
Cowen and CompanyPatrick Howe
David Durley, Inc.
Ladies and gentlemen, welcome to the Ichor Systems 2019 earnings conference call for the first quarter.
At this time, all the participants were listening. only mode.
We will have a question later-and-
The answer link and instructions will be held at that time. [
Operation instructions]
This call is being recorded as a reminder.
I would now like to introduce the investor relations of Claire McAdams, the host of Today\'s meeting.
Please continue.
Operator, Claire McAdam. thank you.
Good afternoon, thank you for attending today\'s first quarter 2019 conference call, which will be remotely replayed on Ichor\'s website shortly after we finish this afternoon.
When you read our earnings press release and listen to this conference call, please recognize that both contain forwarding-
Forward-looking statements in the sense of federal securities law. These forward-
Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and may result in significant differences in actual results from such statements.
These risks and uncertainties include the risks and uncertainties set out in our earnings press release, as well as the risks and uncertainties we describe in our annual report in table 10
K. the 2018 fiscal year document submitted to the SEC and the document described in the document subsequently submitted to the SEC.
You should consider all the progress.
Look at the statements based on these and other risks and uncertainties.
In addition, we will provide some
During this call, the GAAP financial indicators and our earnings press release contain these non-
Based on the most comparable GAAP financial measures.
Today, I received a call from Tom Rohrs, Chairman and CEO of Ichor;
Jeff Andreessen, our President and Chief Financial Officer
Tom will review our performance and prospects first, and then Jeff will provide more details about our growth plan, first quarter results and second quarter guidance.
After the ready lecture, we began to ask questions.
I\'m transferring the call to Tom Rohrs now. Tom?
Thank you Claire, welcome to our first quarter conference call.
In the current downturn in the industry, Ichor continues to operate with strength and profitability.
Revenue in the first quarter exceeded our expectations, exceeding the midpoint of guidance to $0. 138 billion.
This represents a decline in 2.
5% better than most of our peers and clients reported.
We think that means two things.
First, our market share growth helped offset the weak spending environment; and second, when we entered the second quarter, the inventory correction was largely behind us.
Our results also show that our customers did not adopt a strategy to reduce outsourcing during a period of weak industry spending.
In the first quarter, we continue to make progress in implementing our strategy to expand our share in the market we serve.
This makes us more confident that our income level will increase significantly in the second half of this year compared to the first year.
Our revenue for the first quarter was $0.
$25 per share, $0.
Although it is not yet at the midpoint, it still shows steady profitability at these income levels.
I feel that in the last two quarters, we have adapted well to a weak business environment as we execute the right strategy.
Today, we balance our resources between the current level of business and the sales we expect to increase in the second half of the year.
With the reduction in our operating expenses and the change in the structure of manufacturing costs, as our revenue rebounded in the second half of the year, we will be able to demonstrate our financial and operational leverage.
When we look forward to the second quarter, we expect revenue levels to be similar to the first quarter.
We believe that this reflects a continuing good trend in our performance compared to the overall soft wafer fab equipment spending environment.
For example, while we believe that most of the downward revisions and industry expenditures have passed, recent industry reports show that the number of new OEM system delivery process tools continues to decline slightly by about 5% in the second quarter.
Especially for Ichor, before their revenue grew significantly in the second half of the year, we saw a one-quarter decline in sales for our flat print customers.
Offset these two quartersover-
Quarterly headwinds are the incremental business we gain in each service market and win.
As we said last quarter, we are still on track to achieve incremental revenue for this year\'s market share growth of about $75 million to $80 million.
Our gains so far are incremental. -
Excuse me, our growth so far contributed single-digit incremental revenue in the first quarter.
We expect to enter double digits in the second quarter and accelerate from there.
Based on our comments last quarter, we continue to anticipate that the incremental revenue we receive from market share growth will be strongly weighted in the second half of this year.
Jeff will discuss our progress in a prepared statement.
With this trajectory, we really don\'t need to see a substantial recovery in WFE spending in order to see meaningful growth in sales and significant operational leverage as we make progress in the second half of the year.
So, while the environment for process tools is weak for the rest of 2019, we are confident that our second half will be stronger, not only because of the sharing of benefits,, also because of our position in the EUV exposure, we will see the volume bounce from q3 to record levels.
In addition to that, we can start to see a modest replenishment of our component business inventory later this year, in preparation for increasing the demand for etching and deposition tools, which will reach 2020.
While we remain cautious in light of the current business situation, these factors all help us to be optimistic that the speed of our revenue when we exit this year should be a positive indicator of stronger financial performance in the future.
So, in 2019, when we advance in a challenging business environment, our strategy remains the same.
We are a supplier of semiconductor equipment focusing on fluid delivery technology.
We believe that the semiconductor business will continue to grow faster than most other industrial businesses throughout the cycle, and we are very good --
Position with our key customer customers.
We also have a few strategic foothold that will help to increase our share of the service market, with Ichor\'s total opportunity of up to $400 billion in spending years.
In the past four years we have surpassed the annual growth rate of 12% for fab equipment, and our own annual growth rate is about 25%. we fully expect that as we seize the opportunity of share growth, we will continue to grow the expectations of the WFE market faster.
Before transferring the call to Jeff, I want to stress that he was promoted to president.
The promotion commended Jeff for his significant contribution to the continuous Ichor over the past year and a half.
Jeff\'s leadership and financial and operational expertise will be a key factor in leading the company through the next important growth phase in the market we serve, with a focus on continuous improvement of operational execution and financial results.
As chairman and CEO, my focus is on executing the company\'s growth strategy plan.
In his new role, Jeff is now responsible for managing all operational aspects of the business, including sales and marketing, R & D and operations.
Prior to the appointment of a new chief financial officer, he will continue to serve as the chief financial officer of the company.
In this way, I will have Jeff provide an update on some of the key highlights of the progress we made in the business plan in the first quarter, he then guided our prepared comments with the financial details and q2 of our first quarter performance. Jeff?
Thank you, Tom.
It\'s a seamless transition as I become president.
So far, at my meetings with major clients, I have been greatly encouraged by the strength and collaborative nature of our customer relationships.
Similarly, in the strength and collaborative nature of the Ichor leadership team, I am also encouraged by the progress we have made so far in finding a strong talent to take over my role as CFO
As Tom mentioned, with 2019 of the industry spending lower than expected, we are on track to earn $75 million to $80 million in incremental revenue from market share growth this year.
We are very satisfied with the progress made so far, and in the first quarter, we specifically confirmed revenue related to natural gas delivery systems, welding chemical delivery systems and components, and precision conference sharing victory ---machining.
I should point out here that the Tom mentioned just now is [indiscernible].
In our gas delivery business, we have earned incremental share in two of the largest customers.
The first is in the fourth quarter, the first quarter starts shipping, the second is in the first quarter, and the first quarter starts shipping later.
In our welding business, we have qualified on several waves of parts with a new customer and are working on more parts.
These qualifying stages represent more than half of what we are pursuing this year.
We have now completed the expansion of welding and chemical delivery of plastic products in Malaysia.
Our expansion in this low-cost region will enable us to compete more effectively in other areas of the wider chemical delivery market.
Our precision processing business is less qualified for a longer period than the welding parts of our business.
While we see little revenue for the new win, it is expected that there will be the first meaningful income in the second half of this year.
In our chemical or liquid delivery business, we have gained some additional shares that are incremental for our proprietary liquid delivery modules and are expected to start revenue in the second quarter
The biggest growth in our chemical delivery business is still the proprietary liquid delivery module.
We have started our revenue growth and we hope to see more meaningful LDM revenue levels in the second half of the year.
We continue to take solid steps in our geographic expansion strategy, while our IAN engineering business continues to be negatively impacted by lower levels of memory spending this year.
In the first quarter, we completed an extension of our existing supply agreement with South Korea\'s largest customers, and we are taking advantage of this slow time to redouble our efforts to penetrate more Korean OEMs.
Although we are still in the early stages, we still have great opportunities in Korea.
In Japan, we continue to make progress on cooperation agreements, which will enable us to sell our LDM products directly to OEMs in Japan.
In terms of R & D, we are developing an innovative new gas delivery platform and are currently in the initial stage of discussion with our customers.
The platform will bring technical and cost improvements to our customers.
To sum up, we have made comprehensive and solid progress in the incremental income plan, and the income from these share earnings will continue until the second half of the year.
These are combined with the back-end loading year of our third-largest customers, putting us in a good position in the second half and 2020.
I look forward to introducing you on a quarterly basis about our progress.
Let me now discuss our financial performance and our outlook for the second quarter.
First of all, I would like to remind you that the profit and loss indicators discussed today are
Unless I determine the measure as a GAAP-based measure.
These measures do not include the impact of stocks.
Based on compensation expenses, amortization of acquired intangible assets, non-recurring expenses and independent tax items and adjustments.
I would also like to point out that the schedule will summarize our GAAP and non-
The Investors section of our website can find GAAP financial results as well as key balance sheet and cash flow indicators as well as revenue by geographical region.
Revenue fell $0. 138 billion in the first quarter.
Compared with the fourth quarter fell by 5%, compared with the same period last year fell by 47%.
Our gross profit margin for the first quarter was 14.
The fourth quarter fell by 9%, mainly due to the fact that the product mix was not very favorable and the number dropped slightly.
Operating costs $11.
An increase of 7 million over the fourth quarter, although we forecast a slight increase in payment times for employer taxes and variable pay, operating expenses are slightly higher than forecast due to lower levels of NRE funded by clients.
Operating profit margin 6.
4% fell by 110 basis points from 2018, due to a slight decline in gross profit margin, which is an increase in operating expenses in an environment where revenues are relatively stable.
Our interest expense for the first quarter was $2. 8 million.
Our tax rate for this quarter is 7%, and the lower tax rate is mainly due
Time adjustments and a slight reduction in tax rates compared to forecasts.
Net income for the first quarter was $5.
6 million is equivalent to 4% of income.
Earnings per share are $0. 25.
Now let me talk about the balance sheet. Cash of $31.
A decrease of $6 million was 12.
With than 2 million
Debt fell by $7.
4 million, capital expenditure of $4.
$9 million and $1.
In our last earnings call we discussed the early stock repurchase of 6 million.
Free cash flow with $5.
The first quarter was 2 million, negatively affected by the back-end loading shipment profile for the quarter, which also increased the unfinished day sales from 26 days in the fourth quarter to 36 days.
Inventory fell 6% from the fourth quarter and $7 million at the end of the quarter to $0. 114 billion.
Now let\'s talk about the guidance for the second quarter.
Our forecast is that revenue is between US $0. 133 billion and US $0. 143 billion, which is positive and negative 4% from q1.
Our revenue guidance is better than the forecast of new system shipments, and the new system of the second quarter process tool shows that our market share growth contributes more to sales than q1.
Our earnings guidance is $0. 20 to $0.
Compared to the first quarter, $26 per share reflects similar operating profitability, but the tax rate is higher at 11%, compared with q1 at 7%.
We expect gross margin and operating margin to start improving in the second half of the year.
Operator, we\'re ready to answer the question.
Please open the line. Question-and-
Thank you. [
Operation instructions]
Our first question came from Ho of Deutsche Bank.
You can continue.
Sydney HoThanks ride my question.
My first question is that you talk about the increased confidence in the second half of 19 years will become stronger in the first half of the year.
Would you mind giving us a range that you would like, just for a little more color.
Do you expect the core business to be flat? -
This kind of thing in the core business is more than half of the units, which means that incremental income will come from stock gains and new opportunities?
Tom RohrsYes, it\'s basically right, Sidney.
We expect positive and negative core revenues to be flat. I think we --
Last quarter we used the word \"hit along the bottom\" but we still felt like we were hitting along the bottom.
I think you might notice that I think Lin\'s second-quarter guidance has dropped by about 4% for the company in the past quarter, which means that the new system has dropped by about 6%.
We don\'t know exactly what will be applied, but the bottom line is that there is not much going up. -
We don\'t see much growth at this point.
So hitting along the bottom is a good way to describe it.
There are several exceptions to this.
I think you know, most people know ASML is looking forward to the second half.
In the first quarter of last year, we spent a year with ASML, and I mentioned that ASML\'s second quarter revenue fell a lot for us.
If you listen to their revenue, they talk about making some improvements in their first version of the EUV tool, which will start production in the second half of the year.
So we\'re going to see an increase in ASML revenue, but we think the core process tools will rebound along the bottom and then most of the share will increase.
Our target is $75 million to $80 million. a large portion of revenue will appear in the second half of the Year. the third quarter is much larger than the second quarter, and then the fourth quarter is much larger than the third quarter.
So when you ramp, you can draw yourself and understand what this might look like. Sidney HoGreat. That’s helpful. My follow-
The problem is that you mentioned earlier that you expect to normalize the customer inventory level at the end of q1. Tom RohrsYes.
HoAnd Sydney Review [indiscernible]
I think it\'s Jeff. Tom RohrsYes.
Sidney HoI is curious if you think the inventory of your biggest customers and other customers is normal?
I asked because the data points still seem to be very confusing.
Maybe just a follower.
On top of that, when you look into your booking, can you talk about the linear relationship of Q1, maybe by April.
Has any terminal market picked up significantly? Thanks.
Jeff and Reina.
So we think that, in general, the stock correction has started, and that\'s good news.
By the way, this is not to say that it is running in every product and every product line of each customer, because obviously all of these customers have many different products, they carry different product inventory levels depending on the product, depending on what they think things will do for them on a very individual basis.
So we\'re not talking about a clean-up that happens at the same time.
Some people get better than others, but overall we see a lot of stock correction, which means that if Lin\'s shipments will drop by 3% or 4%, in theory, our shipments should also drop by 3% or 4% as we take out the goods from our inventory so it won\'t exceed that.
Now we tell you that our shipments will be flat in the second quarter.
They won\'t drop by 3% or 4% and we also tell you that we expect ASML to drop a lot when they improve their product so that\'s why-
The growth of market share is so important because they have brought our downward resistance back to a flat level in the second quarter.
Thank you very much.
You\'re welcome, Tom rose.
Jeff AndresonAnd then, Sidney, you have a question about the booking, please keep in mind that our booking has a couple of weeks. So it\'s a --
It\'s not a powerful indicator of a lot of backlogs or other things, it\'s their visibility into last year\'s business . . . . . . Sidney Hook. [
Multiple speakers.
Jeff Andreessen was sorry for the last quarter. Tom RohrsYes.
Sidney, thank you.
The next question we have is-
With Davison.
You can continue.
Good afternoon, Tom.
I guess, the first one you\'re talking about is an increase of $75 million to $80 million, is it an amount of $1?
Is this the speed you expect to run by the end of the year?
Jeff and reson this is a dollar amount, which means that the running speed at the end of the year will obviously be higher than that.
So Tom said it\'s been growing this year and we\'re talking about it being single digits and then double digitsdigit.
So you can infer from this that it will be a fairly large weight and then exit, the level of the fourth quarter is much higher than the ramp for the whole year. Tom is fine.
Then, when you see the new business you are adding, is there a significant difference in the profit structure between gas plate work and welding and precision machining?
I mean, some share of Tom RohrsYes is obviously gas panels, but I would say that in welding and precision machining, even later this year, their margins are higher than what you see in business today.
In general, we have discussed that our welding is around 20 s, about 20 s lower, precision machining is around 30 s lower, and LDM is somewhere ---
Somewhere between the two.
So this will be a step-by-step growth for us.
Good, Tom.
Then when you see different segments, I mean, memory and logic casting, do you have meaningful content differences in different end markets of different system types they serve? Tom RohrsNo.
As we all know, the top three of our clients are Lam, applying ASML and then ASML is a bit lower than Lam because Lam obviously tends to remember, and I\'m sure most people will argue, apps tend to be more logical or casting.
For ASML, of course, they are using comprehensive.
So what I\'m trying to say is that with all this joining, the industry may be off the logic ---
Sorry for the memory of logic and casting, we may be looking very closely at the industry breakdown.
Good, Tom.
In the end, you talked about the opportunity in Korea.
Do you have to add facilities there or do you have to buy local companies or how do you penetrate this market?
Tom lorry. -
We basically made a one-year acquisition.
It\'s called Ian engineering at this time.
It has footprints.
Clean Room.
What I want to say is that in order for our business to grow significantly, we have to invest a certain amount there to increase capacity. Tom is fine.
Thank you for your time.
Tom Rosh bet
The next question comes from Carl Ackerman and Cowen.
You can continue. Carl Ackermann
Thank you. I had two.
If I can go back to the previous question, I appreciate all the colors of your opportunity to expand from UV [ph]
This year, we have adopted an incremental design of $75 million and won some [indiscernible]
Target the prospects of equipment suppliers in Japan and South Korea.
Back to the previous question, when should we expect to get meaningful revenue from equipment subsidiaries in Japan and Korea?
Is this 2019 event or more in 2020 event?
Japan\'s Tom rohrstrom is definitely 2020. The --
I think if you remember what we said, we are actually very close to reaching an agreement now, but we are now in the second quarter of this year.
While we know it takes a reasonable amount of time, our schedule is a bit right.
Therefore, we are confident that as we begin to carry out different types of qualification in this case, we will start to see some revenue in early 2020.
What we are seeing now is Korea\'s revenue, so the question is more about what makes sense.
I think you need to recall that the company we bought, we basically bought it for $4 million and then made money.
So it\'s not a very big-
Despite our income-
This will be double.
As we move forward, the income has reached the number of digits.
We kind--
Frankly, we, the timing of the acquisition is not very good, and as we said just now, we bought it for about a year --
Maybe a year ago.
In June or five years ago, people began talking about Samsung\'s big memory cuts.
So, as we reported, revenue was hit and I want to be on a couple of calls.
This is not the level we originally thought, but there is a continuous source of revenue there, it is a customer, there are several big customers in Korea, including more than $1 billion in revenue customers, they are our main customers and we continue to earn revenue from them.
Finally, we will continue to work with smaller local potential customers.
Helpful Carl Ackerman
Back to Sidney\'s question, I think you mentioned that the core business will be flat in 2019. Tom RohrsYes.
I think, if I remember correctly, I think they put more in memory than in logic and casting.
So, when memory producers shift from greenfield investment to conversion in 2019, what do we think about the demand or capital strength of your gas and chemical modules, maybe 2020?
There are a few things about Tom rose.
First of all, when we say that this year will be flat, we are referring to the flat starting from where it started.
As you know, fab equipment is down about 20% this yearover-
Memory-related Fab devices are down more than last year.
So I don\'t want to suggest we\'re flat this year. over-
As far as the fab equipment is concerned, from the first quarter to this year, we have not seen a big recovery, as we thought earlier this year, the core business may recover in the second half of the year.
So I want to make it clear, and I think it will be clear, too.
I believe this will be the case.
If that\'s the case, we might see people lowering their fab equipment total throughout the year, as the original WFE drop figures mostly include some slopes, with the latter half of the core business growing.
Having said that, going back to memory, casting, and logic, we have roughly the same connection rate on these tools as we spend on each tool, if you wish.
There is not much difference.
So we won\'t worry too much if the memory is high and the logic is low, and vice versa, and we won\'t worry too much.
We would be happy if someone bought the tools and put in more process equipment, and we are not too worried about whether it is green space or technical improvement or addition
Factory now.
On the basis of tools, all of these are more or less the same for us.
Tom, Carl Ackerman helped a lot.
The last one, if I can, I will let out the floor.
Now that the market has weakened, do you think the valuation is sudden?
Is half cut or raised in the transaction?
Secondly, how do we look at the level of stock buybacks somewhere today? Thank you.
In terms of buybacks, we bought back about $90 million in stock at one price last year. -
The overall average price is about $20.
From an economic point of view, this is quite successful.
From what point of view-
The repo We see this year is not on the list of things we have to do.
It\'s a bit difficult about the deals we see because everyone is a bit different.
We \'ve seen all the deals that the industry has recently completed, and to be honest, we \'ve passed them on.
When we look at a transaction and the financial capabilities of the company, if you wish, we would like to see a transaction where the company\'s P/E ratio reaches or falls below our P/E ratio.
While in mergers and acquisitions, many people like to talk about EBITDA for many reasons, everyone in the private equity sector is talking about EBITDA.
We tend to talk about p/e because that is the issue we are dealing with and you guys are very interested in earnings per share and I have to be honest at 4.
It has been 5 years as a listed company, and no one has ever really asked me on the revenue call, how is my EBITDA going?
So we tend to look at things from a P/E perspective.
If people pay 20x P/E, or people ask for 20x P/E, while others are willing to pay 20x, such as 2018 P/E, because knowing this is frustration from 2018, we\'re going to pass on this deal.
Thank you for the color.
I appreciate it.
Our next question comes from Patrick Ho, who works with Stifel.
You can continue.
Thank you very much.
Tom or Jeff, in terms of the $75 million to $80 million incremental market opportunities you \'ve talked about in the past, the market opportunities you \'ve talked about are very broad --
From your fluid delivery system to welding parts to precision machining.
Can you give a little bit of the color of where you might be most surprised, whether you see it or not--
Maybe a faster gain than you think, I think, how can some of the gains you made in 2019 also expand or extend to 2020?
Tom rothers, so I guess, I was surprised, and I think we actually followed well.
What I want to say is that there is an area that can move faster than we originally thought, and that is welding.
I think our customer base has a strong appeal to welding, and I would say that even today, even in this quarter, we have seen additional enhancements in this regard, this area may be over 2020 when you go through qualifying and other races, but what I want to say is that we have a good feeling for the victory of the gas Team, but this actually accelerated a bit in q1.
I said we won another share and executed that share in the course, which was more positive, which pushed some of the shares forward a bit and reduced the back end peak, but the weight of it to the back end is still very large.
So essentially, we are very happy with where we are and the opportunities we have to continue working, and we actually see more opportunities, and I would say, today is more than we actually see when we enter this year.
Jeff AndresonPatrick, I would like to add that precision machining is probably a post-expansion where the qualifications are much harder.
Not just the qualification for accurate measurements, you can make the actual parts in the process of defeating them, but also a variety of special coatings that are carried out within the precision range ---
Precision machined parts, especially when they are in contact with process-critical gases, etc.
This only takes more work and more time to try a variety of different gases through the Channel, in precision machined parts, if you wish. Patrick hogratThat\'s helpful.
Maybe as a follower of me
The problem is that your model shows the flexibility you have talked about in the past in providing profitability.
Gross profit margins are actually well maintained at around 15% due to lower revenue.
Will absorption be the biggest impact [when we look to the future]
Technical difficulty
On the basis of the future, there are still problems in gross profit margin or product portfolio, which will affect the future gross profit margin?
Tom RohrsYes, I mean, it\'s clear that the portfolio can swing you in a quarter. We have --we --
If you look inside the gas, but it may be somewhere between chemistry and gas, so it won\'t be our biggest swing. Getting --
Once we have increased our leverage, we will have the fixed cost infrastructure we have, and we have done the same ---
We focus on what we know. -
Call it the direct workers in our operations, who do a very good job in promoting process improvement, etc.
And then, as we continue to grow, I think that goes back to the early question of a new market share growth at a high level ---
Overall, gross margin is higher than today\'s core business.
So it will also be growth. Patrick.
Thank you very much.
Patrick, thanks Tom Ross.
The next question comes from Quinn Bolton and Joseph Needham.
You can continue.
Ladies and gentlemen, Quinn Bolton
Jeff, thank you for your promotion.
If someone asks me a question, I am sorry that I was hit by a conference call halfway through the Q &.
But I would like to ask first, in terms of the welding business, your biggest competitor at gas panel company recently acquired the welding business and would like to know what you think is [indiscernible]
Competitive Landscape in the welding industry?
And then I did. up question. Thanks. Tom RohrsYes.
Of course, we are aware of this too, and we know quite well about this company. We had spent --
I personally talked to them for a while before.
From our point of view, there are a few things that are important.
This has nothing to do with how others see the deal.
So there are a few things.
One is that in the field of welding, what we are seeing now is that what we are using is that customers are beginning to understand that there are many different flavors of welding.
There are tracks [for simplicity [ph]
Mainly welding done with machine, this is [indiscernible]
In terms of labor, the technical requirements are low and easy to do.
Then there are more hands.
It\'s called TIG welding on it, but it\'s a hand-
Very, very skilled operator and more difficult to operate.
So when we see the opportunity to increase the capacity of Welters through acquisitions, our strategy becomes, and we decide not to do so.
We have decided to build capacity for ourselves in Malaysia.
We decided to make it dominated mainly by low-end track welding, which would be most of the capacity we have always had ---
If we choose M & A, we will buy it all the time.
We are confident that we can add about $50 million in capacity, about $5 million, and $6 million in capital, if you like.
Then what we\'re going to do is track welding, where we can get a share and put it there, because we know that labor costs in Malaysia can be 25% of labor costs in the US.
So customers see these low
End the welding piece as a more price competitive thing.
We hope that in this area, we can compete in this way and still make more profits for ourselves. we choose to put money into capacity-building rather than buying.
Thanks, Tom. Quinn Bolton.
The second question, sounds like in a prepared script, you said you started shipping the first delivery of the liquid delivery module to your main customer, and I\'m sure you said there might be some expansion in the business
Just wondering if you can clarify whether this tool is now being shipped to multiple equipment manufacturers or whether the ramp is still-
How is the relationship with major customers? Thank you.
Tom RohrsIt is still with major customers.
I suspect this will end by the end of this year.
In the third and fourth quarters, we will start qualifying for new customers, which will take a little time.
The good news is that the main customer is a big customer with a big appetite and there may be a lot of tools in the end.
So, normally, it\'s a little weird that you don\'t usually go-
The first answer is usually not the best player in town, but it is the best in this case.
So we are happy about it, and we don\'t care about it.
But to answer your question, it means we will be dealing with a client most of the year.
Thank you, Tom.
Our next question comes from [indiscernible]with RBC.
You can continue.
Unidentified analysts, guys.
Thank you for answering my question. I had two.
The first one is about your two largest clients.
So my understanding is that Lam benefits more from the transition of the manufacturer tier that they might have spent earlier.
So, how can I compare it to what you are now commenting on the second half? Even though we hear Lin\'s comments that they will start to pick up in 2 hours
Tom rohrstrom, first of all, I hope that Lam\'s comments are absolutely correct because we will benefit if they do.
I\'m glad I was wrong because if Lam--
Lin acquired the core business in the second half of the year.
I will only tell you that I have not seen it yet.
I will pay close attention and we may be the first to really start seeing it because we have a good understanding of their construction plans etc.
So I hope you\'re right and I hope Lin did well in the second half.
Unknown analystGot it.
Then from--kind of [indiscernible]
Look forward, I think--
I think people are already looking forward to around $40 billion, so can you help me understand what people mean by taking down their numbers more than that? Because I think most people already have $40 billion or less even though they may not be in front of them yet.
I think it is $40 billion, $40.
5 billion or whatever the number is, where everyone is today.
Basically, when I do math, if the core business doesn\'t get better in the second half of the Year ---
In other words, if the second half is exactly equal to the first half, then, I believe, WFE will drop a bit if you do math on this scene-
It will cost just under $40 billion.
Now, the wildcard in it is ASML, and again I hope ASML broke the roof of the numbers in the second half because we will benefit from it.
But without at least some sort of boost in the second half, I think it will be difficult for WFE to reach $40 billion.
Analysts of unknown reasons understand.
And then as far as I\'m concerned, the last one-
I don\'t know your number [indiscernible]
The quality is very good.
So when I look at your 10-
K. You said Lam is about 56% of customers. year.
If I look at June and 3, will you? -
You mean you think Lin-
Or is Lin less than in the third quarter, except for June, which basically means guidance? Tom RohrsNo. Now it\'s --
There won\'t actually be much difference.
Analysis of unknown causesOkay. Thank you.
Our next question is from David Dudley.
You can continue.
Thanks to David DuleyThanks for answering my question.
Many of them have been answered.
But I want to solve the income problem in the first half and the second half of the year here.
You have guided the first half of the revenue to basically two quarters of $0. 138 billion, which is about $0. 275 billion for integers.
You have talked about this incremental opportunity of $75 million to $80 million, and it sounds like there will be an incremental opportunity of about $15 million in the first half of the year.
So let\'s say that there will be $60 million left in the second half.
I\'m checking my math.
It sounds like your income will grow by about 20% in the second half than in the first half.
Is that the way we should think about market share growth?
Tom rohrstrom, that\'s the right way, but when I say single and double digits in the first and first quarter, you\'re a little low in the first half
Figures for the second quarter.
It doesn\'t necessarily mean 5 and 10, but you\'re on the right track.
This is indeed--
This is exactly what it means.
So if you actually say that the first half is 20 or 25, or 15, or any of these numbers, then you subtract it from 75, this will be our number to enter the second half of the year as incremental income.
David DuleyAnd will correct me if I\'m wrong, but I don\'t think ASML revenue is part of $75 million to $80 million, so wouldn\'t that be a little higher?
Tom RohrsNo, there is no part of ASML in this number.
Jeff and Reina.
So if they were [indiscernible]
Then you should have a second half growth that is more than 20% higher than the first half.
Tom Ross thinks, Dave, we\'re not too specific, but you\'re a little light in the front ,[indiscernible]
Yes, but we don\'t want to be specific anymore. yes. David durayor
I haven\'t heard you say this before, so I want [ph]the question.
In terms of your overall salary structure, what do you think is the fixed percentage and what do you think is the variable percentage?
Tom rohrstrom, I mean, we are very variable if you put the material content.
In other words, I will not give you the exact percentage, but it will be 80-
Ish is very variable, and the rest is either a fixed infrastructure or an operation required to run the business. So --
In broad numbers. David durayorThank you. Tom RohrsOkay.
Our next question comes from [indiscernible]
Fund management.
You can continue.
An unidentified analystHi, guys.
In this market, the market share is growing at an annual rate again ,[indiscernible]
Trying to get to a ramp is really important in 2020.
Graeme [Tom Rosh]ph]
I know you\'re guessing we won\'t be [indiscernible]
Specific release.
I think what we\'re referring to is, do you know what we\'re seeing is being single?
In the first quarter, the number will be double between 5 and 10.
If you suggest this slope, you will find that this is a very strong exit rate for those new shared gains.
But I\'m not going to say it\'s like the super big hockey stick in the fourth quarter. It\'s going to --
The third quarter will grow on the basis of the second quarter, and then grow.
Unknown analysts good
Then, in order to have a feeling for next year, there may be any big changes next year, or there may be adverse changes.
Are there any other big ones? -
You mentioned Japan and Korea, and . . . . . . Jeff and resonance, the big change next year is-
Well, actually by next year, we are fully expecting a slow rebound of six quarters --
You always call it the core business when it comes to fab equipment spending.
I don\'t mean it means it\'s going back to $50 billion, but it\'s going to be very, very important and I think we\'re totally looking forward to seeing that.
Unknown analyst
So you\'re also looking forward to stock gains next year?
Jeff AndresonWell, we will obviously look forward to the common gains we have made this year, and Jeff has said that the speed of these gains will be multiplied by 4 by the end of this year.
It will be much higher than $75 million.
We would therefore like to see them continue, and we have every reason to believe that we will continue to work to generate more share gains on that basis.
Analysis of unknown causesGreat.
I just want to ask you a more common question, but how is the cost increase from the point of view of purchasing materials and your price and [the price increase]indiscernible]
Is it steel or something? Thanks.
Yes, I. -
Especially steel, we don\'t really see it.
It will not rise for us.
We didn\'t see a bunch of goods today and the price went up.
We\'re pretty isolated--
I should say that it is insulated from customs duties to the present.
So this is a good thing.
Unknown analystThank you.
Thank you, Graeme.
Thank you, Tom Ross.
Our next question comes from Ho of Deutsche Bank.
You can continue.
Sidney Huo, thank you for taking my call.
There is only one problem.
I just wanted to go back earlier on this gross margin issue. If I know [indiscernible]
Last time you were at these levels of income.
Your gross margin is above 100 basis points.
But again, the product mix now installed in welding and precision machining, I don\'t know how big these products are. They are --
But can you help us bridge the gap between the past and the present? And a follow-
In addition to that, you may be more looking forward to seeing the level of income [and] what kind of combinationindiscernible]low-
I think the end point of your target distance is 19% to 20% which is a long distanceterm reach.
I mean, there\'s a lot--
To be honest, back in the past, Sidney, there are a lot of obvious moving pieces that do recognize that this is a bit different from the back of pure gas, and at that time, we got higher content.
We have some businesses that are more affected by the fixed overhead rate, which is in our precision machining, some of our plastic machines and some of our welding pieces.
When we get out of the process and grow, you see a bigger increase.
We didn\'t set revenue targets when we got into the model, but like-for-
Just like we were running almost $1 billion in the first half of last year.
Gross margin is only hair with a gross margin below the gross margin point or so.
When we return to a similar level, we will have a higher combination of welding parts and precision machining in some other market share growth, which will help us achieve this goal with hope.
So next time if we reach a $1 billion run speed, we hope we will be within this gross margin range.
Tom RohrsYes, I think there are a few things if I can add a bit.
This is a good question.
Normally, the last time we reached this level, we started.
Usually, when your business grows, when you grow through certain income levels, your profit margin will actually be higher than if you hit the same level in the process of falling.
The reason is that on the way forward, you are more focused on the organization, a specific tool, in terms of squeezing more output from a specific property, a specific asset, over time, you will do this in all sorts of crazy ways, etc.
When everything is finished, you are more productive on the way up than on the way down, no matter how many appropriate sizes you try in the process of falling, it\'s just a way.
But the real analysis is, I think Jeff said that, but we did increase the fixed cost when we started moving forward, although at certain loading levels, profit margins will be higher for all of these items, but all of these loading levels are now about half of them.
So when all the things are said and done, we won\'t be surprised, such as the 100 basis points below, some projects with high profit margins are usually not high, just because they are projects with higher fixed costs.
So, Sidney, I think that makes sense.
It\'s Sidney Hayes. Thank you.
Sidney, thanks Tom Ross.
Thank you, ladies and gentlemen.
This concludes the Q & A session of today\'s meeting.
I would like to transfer the call to Tom Rohrs if there is any closing remarks.
Tom rohrstrom, thank you very much for joining us at this quarter\'s conference call, and we are again looking forward to providing you with the latest information at the second quarter conference call on August.
Thank you all for attending today\'s meeting.
This does end the program and you all may be disconnected.
Everyone has a good day.
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